Under criminal investigation and financial pressure, Borrego Health turns to bankruptcy (2023)

Weeks after state regulators ordered the suspension of all Medi-Cal reimbursements for the Borrego Community Health Foundation, charity officials have turned to bankruptcy court for protection from thousands of creditors owed tens of millions of dollars.

In a Chapter 11 filing that stretches almost 700 pages, the nonprofit healthcare provider known as Borrego Health is asking a federal judge to shield the organization from its mountain of debt while it works to restructure in the midst of an ongoing criminal fraud investigation.

A board resolution included in the filing calls the bankruptcy a “good faith exercise of its reasonable business judgment” that is “in the best interests of the company and its creditors.”

The federally qualified health center, or FQHC, usually collects higher-than-usual reimbursements from Medi-Cal for delivering medical, dental and mental health services to rural and needy patients in San Diego and Riverside counties.

But state public health officials ordered those reimbursements suspended last month, saying the provider had failed to implement reforms it agreed to last year after a similar suspension in late 2020.

Among the thousands of creditors cited in the bankruptcy filing are casinos, restaurants, public relations firms, the Walt Disney Resort and a number of hotels, including the Watergate Hotel in Washington, D.C.

Borrego Health also owes unspecified amounts to the city and county of San Diego, the San Diego police and sheriff’s departments, a host of state and federal agencies, a company owned by the El Cajon mayor and a flower shop in Allied Gardens, among many others.

The board resolution, which is included in the U.S. bankruptcy court filing, notes that the nonprofit has brought in a slate of new advisers, including bankruptcy lawyers, a restructuring consultant, a law firm that specializes in health care regulation and a claims agent.

The Sept. 12 bankruptcy filing comes nearly one month after the California Department of Health Care Services took the unusual step of suspending all Medi-Cal reimbursements to Borrego Health, a penalty that was supposed to take effect later this month.

State regulators first suspended reimbursements in November 2020, weeks after dozens of FBI and California Department of Justice agents executed multiple search warrants at Borrego Health clinics and offices, and one of its primary contractors.

But the payments were largely reinstated early last year, after the provider agreed to a series of changes imposed by the state, including the placement of an approved monitor.

In a statement, Borrego Health said the bankruptcy protection would prevent the Department of Health Care Services action from going into effect. It also will safeguard the organization’s ability to keep delivering services to tens of thousands of patients, the charity said.

“Unfortunately, the misguided action by DHCS jeopardizes patients and has led us to make a difficult decision to protect our patients and their access to care,” chief executive officer Rose MacIsaac said.

“Our mission to provide high-quality local access to those most in need drives us forward and this filing with the court will allow us to continue to provide care as we do today while we secure the future of healthcare for our patients,” she added.

Up to $100 million in debt

A Chapter 11 filing does not automatically seek to reduce or eliminate debts that are owed by borrowers. Rather, that U.S. bankruptcy code section provides debtors time to reorganize their revenue and spending under the oversight of a federal judge.

State regulators declined to comment on the bankruptcy filing, or what it means to their plan to suspend Borrego Health reimbursements as of Sept. 29.

“DHCS is unable to comment on issues related to ongoing litigation,” spokesman Anthony Cava said.

The court filings show Borrego Health now serves some 94,000 patients at 18 clinics and six mobile facilities in San Diego and Riverside counties.

Before the criminal investigation was launched in 2020, Borrego Health was reporting many times that number of visits by patients annually.

The San Diego Union-Tribune reported in 2020 that two dental clinics in Desert Hot Springs and El Cajon by themselves recorded almost 700,000 patient visits.

In addition to cutting off Medi-Cal reimbursements, the state wants to hasten the process of directing Borrego Health patients to alternate clinics. But the nonprofit said it needs more time.

“I cannot overemphasize the concern we have with a change of this magnitude being applied on such short notice to communities with few or no other options for care,” MacIsaac said last month. “These types of transitions usually take months to complete to ensure patients don’t experience gaps in care.”

According to the Chapter 11 filing, Borrego Health has between 5,001 and 10,000 separate creditors who are owed between $50 million and $100 million combined. It has assets worth between $50 million and $100 million, the filing also says.

The revenue figures outlined in its declaration represent a stunning decline for the once-mighty healthcare provider, which opened in the early 1990s as a single clinic to serve residents of Borrego Springs but had since expanded to operate dozens of clinics.

As recently as two years ago, Borrego Health was the biggest-funded FQHC in the federal system.

Its tax filing for the year ending June 30, 2020, shows annual revenue of almost $342 million. It also reported nearly 1,800 employees and total assets of $94.4 million that year.

But those figures have dropped dramatically, the bankruptcy filing notes.

Court records show Borrego Health now has $5.2 million cash on hand, $24 million in anticipated revenue from the U.S. government and $6 million in receivable payments from patients and pharmacies.

They also show the nonprofit is spending $1.5 million more every month than it collects. The number of employees has slipped to fewer than 700, though the bi-weekly gross payroll still exceeds $2 million.

“Given the debtor’s operational and legal challenges, the debtor currently operates at a monthly cash deficit of approximately $1.5 million,” chief restructuring officer Isaac Lee wrote in one of his declarations to the court.

One day after the bankruptcy filing, Borrego Health requested the court’s permission to continue paying employees, senior executives and critical vendors like utility companies. The judge overseeing the proceeding has yet to issue a ruling on those requests.

The move to seek protection from creditors is the latest response from Borrego Health to the ongoing joint criminal investigation into allegedly fraudulent billings, self-dealing, widespread nepotism and excessive rental payments.

Criminal investigation

Since state and federal agents seized computers, records and other material from at least five locations during the October 2020 searches, Borrego Health has removed most of the board and senior leadership.

Earlier this summer, the health provider sued dozens of former officials and contractors, accusing them of engaging in systemic fraud, nepotism and deliberately paying above fair-market rent for several clinics.

One of the main creditors cited in the Chapter 11 filing is Daryl Priest, the El Cajon businessman and philanthropist whose offices also were searched by FBI and state agents two years ago.

Borrego Health said Priest is owed $3.3 million, although the debt is listed as disputed. Priest, who also is named in the Borrego Health civil lawsuit, did not respond to a request for comment this week.

Companies owned by Priest leased several properties to Borrego Health at rates that were far higher than market rates and collected $15 million or more a year for processing medical bills for the healthcare provider, the nonprofit alleges. Priest has denied any wrongdoing.

The bankruptcy filing also cites more than $1 million owed to the U.S. Internal Revenue Service and hundreds of thousands of dollars owed to various dentists, although those debts also are reported as in dispute.

Most of the other $50 million to $100 million that is owed has yet to be spelled out. A Borrego Health spokesman said those disclosures will be forthcoming as required under bankruptcy rules.

“These documents are not required to be filed for some time and we have not yet filed them,” said contract Borrego Health spokesperson Daniel Kramer, whose company also appears on the list of creditors.

Brodwell Behavioral Health Services, a company owned by El Cajon Mayor Bill Wells that delivers mental health care to patients on behalf of other providers, also is listed among the creditors.

Wells said his relationship with the nonprofit ended earlier this year.

“We stopped working with (Borrego Health) over six months ago,” the mayor said this week. “I think it’s true that they have a small balance with us, but frankly we don’t expect to ever recover that.”

Other notable creditors

Other notable creditors include the San Diego Zoo, San Diego State University, the San Diego Association of Governments, Rady Children’s Hospital, the San Diego Hunger Coalition and the San Diego Flower Shop on Waring Road. No amounts accompany the listings.

Vitamin D Public Relations, owned by former Republican congressional candidate Denise Gitsham, is also among the many Borrego Health creditors. Gitsham lost her 2016 bid to unseat Rep. Scott Peters (D-San Diego).

A Seattle-based branding solutions company called Zippy Dogs and Vista events planner Spice of Life also are owed money by Borrego Health, the court filing states.

Many of the creditors are restaurants, both fine dining and casual fare.

Hotel-casinos and other gambling establishments also are listed as creditors, including the Paris Las Vegas, MGM Grand, Planet Hollywood resort in Las Vegas and the Spotlight 29 casino in Coachella.

Kramer said he could not immediately explain why his client owes money to casinos and other unusual creditors.

“Many of the parties identified, specifically those you have referenced, predate current Borrego Health leadership, and we do not have the ability to provide additional detail on the specific services provided at this time,” he said.

The formal notice of the bankruptcy proceeding and a meeting by telephone of creditors have been scheduled for the afternoon of Oct. 18.

Proof of claims is required to be filed with the court no later than Nov. 21, and the deadline for complaints was set at Dec. 19, bankruptcy court records show.